Know-Your-Customer in Banking-as-a-Service: How to Ensure Safe Onboarding Procedures of Clients’ Customers?
Banking-as-a-Service (BaaS) platforms have been gaining more traction in the market as they streamline non-banking businesses’ entry into the financial services sector. Alongside the fully developed banking infrastructure, a BaaS provider takes on the responsibility to adhere to any regulatory requirements, including Know Your Customer (KYC), aimed at preventing money laundering activities and helping to better understand the customers, as well as manage risks more prudently.
Since BaaS uses KYC to onboard their client’s customers, Thibaud Catry, Chief Compliance & Risk Officer at ConnectPay, has outlined key aspects necessary to ensure that this process runs smoothly: a strong in-house compliance team and mutual collaboration.
To provide banking services companies must obtain a banking license, which is both hard to get and difficult to maintain. The necessary infrastructure to carry out transactions and handle funds can cost millions, while using BaaS is usually a fraction of the price — making these platforms a more cost-effective solution.
Infrastructure aside, businesses find it hard to enter the financial market due to strict and ever-changing regulations, which also differ depending on where in the world companies are trying to provide banking services. When choosing BaaS, non-bank entities acquire both the necessary framework as well as the assurance that they are running an operation in compliance with mandatory AML requirements and KYC, which becomes the responsibility of a BaaS provider.
The reason for constant adjustments in regulations is to combat constantly emerging new threats — in the case of KYC, their intent is to minimizeillegal activities like money laundering and fraud. According to Catry, these developments are part of the various challenges that BaaS face when trying to safely carry out their clients’ customers’ onboarding process.
“Each industry has its own challenges, from geo-risk to new modern payment methods providing an additional level of anonymity and fast-changing regulatory landscape. Compliance professionals need to adapt to these nuances, learn about market changes and the potential risks linked with these transformations. When it comes to KYC, some of the main obstacles while onboarding clients’ customers emerge from poor data and record management, which both result in potential risks going undetected.”
To avoid these mishaps, Catry emphasizes the need to focus on compliance specialists. ConnectPay followed this strategy when creating their own new BaaS product, making sure that these experts made up a substantial part of the team.
“For example, a third of ConnectPay’s staff is just the KYC department. It takes quite a number of qualified professionals to keep up with all of the changing requirements and sort through all of the client’s provided data to make sure that their customers are identified and assessed correctly,” Catry emphasized. “It’s not enough to check and verify a customer just once — a BaaS provider needs to conduct ongoing monitoring to detect any possible risks and react accordingly. This is a detailed procedure which requires a number of specialists at work and, considering the current regulatory environment, financial institutions in Europe cannot afford to work with a weak compliance team.”
Although regulatory procedures are the BaaS’s responsibility, it cannot effectively meet all the necessary requirements alone. In order to make sure that everything is running smoothly, Catry says that mutual cooperation is a must.
“Using an intermediary is always a challenge for any FI. At ConnectPay, the team focuses on working with their partner to ensure that the standards they are applying regarding KYC procedures are at a minimum at the same level as ConnectPay’s standards. When it comes to ensuring the safety of onboarding client’s customers, strong cooperation, direct line of communication, and sharing best market practices is key.”
ConnectPay is constantly investing in its compliance department, making sure that all activities of the company are adhering to regulatory requirements. Additionally, any unethical business practices are eliminated during the thorough screening process, ensuring that all of the company’s customers are working inside the legal framework.